Patent competition, rent dissipation, and the persistence of monopoly: The role of research budgets

Abstract

The paper investigates how patent rights can contribute to the persistence of monopoly. Patent competition is modelled as a dollar auction game between two firms, incumbent and entrant. Any bid (expenditure on R & D) in the game constitutes sunk cost, whose total amount is constrained by fixed (research) budgets. The explicit solution (subgame-perfect equilibrium) determines who wins the patent and how the winning expenditures depend on order of play and budgets of firms. The entrant can win if he moves first and has the higher budget. Rent may or may not be dissipated by the competition.